Pyramid schemes emerged simultaneously with the monetary relations, because commodity exchange could not satisfy all market participants. Money immediately became a universal tool for evaluation of all that the eye would catch. Furthermore, it was due to money emergence that allowed pyramids to have reached the international level.
The tremendous boom in tulips in Holland in the first half of the 1600s selves an example of the first financial pyramid. Today we know the Netherlands for selecting tulips of various sizes and colors, but until the XVII century there had been no tulips in the country.
Satire of tulip mania by Jan (II) Brueghel, c. 1640.
It all started with a broad expansion of the Dutch fleet (the largest in the world in those days). In a relatively short period of time the Amsterdam port had become the center of European trade, 1,000 ships passed through it daily.
Commodity-money relations entered a new phase, when stock exchanges were opened in Amsterdam and Antwerp. This strengthened the banking system and began to draw in the business area entrepreneurs from all over Europe. The income level of the Dutch was growing steadily, there were available funds that were eagerly like to spend on art, beauty and exotic things.
First tulips appeared at the court of the King of Austria in Europe, where they came from Turkey. a Frenchman Charles de l’Ecluse was the court gardener who successfully selected several kinds of tulips adjustable to the European climate. several decades later one of the merchant ships brought the bulbs into the Amsterdam port… Tulips quickly became an exotic decoration, their bulbs cost a lot and grew rapidly in price due to excessive demand among merchants – everyone wanted to join the elite society.
The problem was only that the product was seasonal and demand was not satisfied. It was then that dealers began offering to buy their bulbs of the next season. It was so simple at first sight that the amount of such futures transactions grew like a snowball. Enterprising people started buying receipts from trade organizations for the purchase of bulbs in the hope of selling them at a competitive price in high season. So a certain rate was set on tulips, which was steadily growing.
The Dutch began to go mad: craftsmen gave up their activities, citizens mortgaged property, peasants left their homes – all joined the race for the “paper” tulips. Snowballing demand for a specific product dramatically increased its rate against the commodity equivalent. There was a “tulip exchange” at each corner. The rate for tulips was so high that at some point a single bulb could cost a fortune.
A wanderer traveling the Netherlands described what he saw in such a way: “A rich merchant buys tulips for 1000 guilders from a water carrier, to immediately resell them for fifteen hundred to a doctor. However, neither the merchant nor the water carrier nor the doctor has real flower bulbs, nor wish to have them. All are only interested in gains from the transaction».
To be continued to the Part 2